GM's ailing financing arm gets US$5b in aid

By Christopher S. Rugaber  |   2008-12-31  |     NEWSPAPER EDITION

THE United States Treasury Department said it will provide US$5 billion to GMAC Financial Services LLC, the ailing financing arm of General Motors Corp, from the US$700-billion bank rescue program.

The government will receive preferred shares that pay an 8-percent dividend and warrants to purchase additional shares in return for the money, the Treasury said.

Treasury also said it will lend up to US$1 billion to General Motors so that the company can purchase additional equity that GMAC is planning to offer as part of its effort to raise more capital.

The assistance is part of a larger government effort to aid the auto industry and is on top of the US$17.4 billion in loans the Bush administration agreed to provide to the industry on December 19, a Treasury official said.

Analysts had speculated that if GMAC did not obtain financial help it would have to file for bankruptcy protection or shut down, which would be a serious blow to GM's own chances for survival.

Last week, the Federal Reserve approved GMAC's application to become a bank holding company, which made it eligible to receive money from the financial rescue fund. The Fed's approval was contingent on GMAC raising additional capital.

Separately, GMAC said late Monday that it has accepted all the bonds tendered in a debt-for-equity swap that was also part of its capital-raising efforts. The firm gave few details of the swap results.

GMAC "intends to act quickly to resume automotive lending to a broader spectrum of customers," the company said in a statement.

The company's goal is to reach US$30 billion in capital, the majority of which would come from the debt-for-equity exchange. GMAC has struggled to get bondholders to convert 75 percent of their debt into equity of the company and has yet to say whether it has met its goal.

The Treasury's investment in the firm does not mean it is "passing judgment" on whether GMAC has met the Fed's conditions to raise extra capital, the official said.

GMAC said the government's US$5-billion investment was completed on Monday. The US$1-billion loan is still in progress, the official said.

The Treasury said after initially bailing out the auto industry earlier this month that it had committed the first US$350 billion of the bank bailout fund, and said Congress should release the second half.

But in several cases the Treasury has not actually spent all the committed funds, and it will use money that has not yet been spent to fund the investment in GMAC, the official said. For example, Treasury allotted US$250 billion as capital for banks, but has spent only US$162 billion so far.